What is swing trading What is swing trading What is swing trading

What is swing trading

Trading Strategies
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What is swing trading? 

Swing trading is a popular trading strategy designed to take advantage of price movements or ‘swings’ in the markets. Swing traders look to buy or sell an asset before its value makes its next substantial move, before closing their position for a profit. 

Within this guide, we’ll cover the types of strategies a swing trader uses. In addition, we'll look at the variety of technical indicators swing traders master to make judgement calls on whether it's worth going long or short on an asset. 

The basic premise of swing trading 

A swing trader seeks to capture a percentage of a larger market move. They trade on the assumption that the price of assets doesn’t grow linearly. Instead, prices go through many peaks and troughs during a trading session. 

The job of a swing trader is to determine whether an asset’s value is likely to rise or fall next before taking a position in the market. Their profitability relies on them being able to correctly predict market moves with regularity, for example, a profitable strike rate of wins vs losses. 

Swing trading is not like other medium-to-long-term trading strategies that seek substantial moves in the markets. Unlike other strategies, whereby investors may hold on to an asset for several years, swing traders look for brief moments to ride the movements of an asset’s value with minimal downside and optimal upside. 

How does swing trading differ from day trading? 

There is a fine line between swing trading and day trading. The key difference is that day traders will open and close their positions within the same trading session, attempting to extract small but regular profits from minute market moves. 

Swing traders will look to hold positions overnight, sometimes over many days or weeks, to catch the full value of the predicted market move. 

Another big difference between the two is the types of margin offered to day traders and swing traders. Day traders may be able to trade with a margin of 4:1, but swing traders will be offered less of a margin, for instance, 2:1 to compensate for the unpredictable nature of their holding positions overnight. 

Most common strategies for swing trading 

It's a good idea to familiarise yourself with the swing trading strategies that provide a framework for entering and exiting the markets if you're thinking of trying swing trading for the first time: 

Breakout trading 

  • Breakout trading strategies relate to when an asset’s trading range – the range between its support and resistance points – has been broken or is about to be broken. Swing traders use a variety of technical indicators to determine the strength or weakness of an asset’s price in the market. 
  • The most popular is a volume-weighted moving average indicator. This monitors the weight of money buying or selling an asset. If an asset is about to break through its resistance point, a swing trader would look to back it on the premise that the momentum continues and new highs are reached. 
  • If an asset is about to break through its support point, a swing trader would look to short sell it on the premise that the momentum continues and new lows are reached. 

Trend trading 

  • Trend-based swing traders will also look to technical indicators to pinpoint the short-term direction of an asset’s price. Swing traders will attempt to capture a fraction of the overall trend rather than predicting the beginning and end of a price swing. 
  • Moving averages and relative strength index indicators can help swing traders to decide if a bullish trend is likely to continue upwards or whether a bearish trend is likely to continue downwards. 

Using technical indicators for swing trading 

As part of a swing trader’s strategy, they will lean heavily on technical analysis to build confidence in a trading position. The technical analysis revolves around historical price patterns and current price action to establish appropriate entry and exit points. 

Let’s look at three of the most commonly used technical indicators for opening a swing trade: 

Relative strength index (RSI)

When a swing trader has identified a trend in the market, the RSI indicator can help to measure the strength of a trend’s momentum. The RSI can also identify whether an asset has moved so much that it is subsequently ‘overbought’, meaning that it is overpriced and due a market correction. Similarly, the RSI can also reveal if an asset is ‘oversold’, meaning that it is undervalued and due a market correction. 

The RSI ‘score’ is on a scale of zero to 100. Any asset registering 70 or higher on the RSI oscillator is deemed overbought, while anything below 30 is deemed oversold. 

Moving averages (MA) 

An MA indicator assesses the closing price data for an asset over a set timeframe. This helps to visualise its average value for that period. It could be 30 days, 50 days or 365 days. The indicator plots the average closing values for each day on a line graph to chart the movements of an asset. The MA indicator is used to plot or confirm a trend as opposed to anticipating one, which is because the MA graph is a historical chart, so it will always be slightly behind the real-time market price. 

A typical swing trading strategy involving MA indicators sees traders hunt for ‘crossovers’ between two MAs. This involves a fast-moving MA like a 50-day MA and a slower-moving 100-day MA. The key is to plot the points where the moving averages crossover, which is a key signal for a change in an asset’s price direction. If a 50-day MA crosses the 100-day MA and moves upwards, it could signal the start of a bullish trend. Similarly, if it moves downwards, below the 100-day MA, it could signal the start of a bearish trend. 

Stochastic oscillator 

A stochastic oscillator is another type of momentum indicator, like RSI. A stochastic oscillator usually works across the last 14-day trading window, comparing the latest closing price of an asset with the trading range during the last fortnight. It shows momentum shifts that are often visible before market volume peaks, making it an influential indicator for swing traders. 

There are two lines on the stochastic oscillator: the black indicator and the red dotted signal. The scale for the stochastic oscillator is zero to 100, just like the RSI. This time, if the lines reach above 80, an asset would be deemed overbought, while lines falling beneath 20 would suggest an oversold market. 

The pros and cons of swing trading 

If you’re still unsure whether swing trading is the right trading approach for you, look at the following pros and cons to help you decide: 

Pros of swing trading 

  • Ideal for those with time constraints
    If you hold down a full-time job and you don’t have the time to dedicate to sitting in front of your trading software all day, swing trading could be the ideal option for you. Swing trades can last as little as 15-30 minutes in the market or as long as a few days or weeks. The timeframe of a swing trade ultimately depends on how long you expect the trend to go in your direction. 
  • Allow for market moves to happen at a slower pace
    Unlike day traders that look to get in and out of the market for tiny but frequent gains over a day, swing traders will look to get one strong market move to capture their entire profit for the day. They will be less concerned about time in the market and more focused on exiting when the momentum of their trade fizzles out. 
  • Utilise technical indicators to capture trends
    Many swing traders rely on technical indicators to plot their entry and exit points and choose not to listen to any external ‘noise’. The three technical indicators we discussed earlier in the article are all useful for highlighting breakouts from a trading range and the potential for an asset to reach higher highs or lower lows. 

Cons of swing trading 

  • It takes time to master technical analysis
    Swing trading requires you to read and interpret real-time price charts. Mastering technical analysis is not an overnight process. As a retail trader, identifying entry and exit points for a swing trade does not come as naturally as it does to professional traders with years of experience in the markets. 
  • Swing traders are always at risk of ‘gapping’
    Some swing traders will look to take long-term positions over several days or weeks. This could cause you to experience gapping – when the market reopens the following day away from the closing price of the previous day. This occurs when an asset’s fundamentals change suddenly while the market’s closed. 
  • Leverage can magnify losing positions
    Most swing traders will opt to trade with leverage to maximise their open position in the markets. By holding positions for longer than a day trader that scalps the market, swing traders put themselves at risk of larger losses, especially if adequate risk management techniques like stop-loss orders aren’t deployed. 

Swing trading is a credible option for those who don’t have the time to dedicate to day trading the markets from the opening of a trading session to its closure. Swing traders focus on technical analysis rather than fundamental analysis to inform their trading moves. They lean on technical indicators to set entry and exit points, often based on support and resistance areas. This means swing trading can be executed in almost any financial market. 

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